Life Happens: Preparing for the Unexpected On Way to Retirement

Some people spend decades preparing for a comfortable retirement, only to get derailed by unexpected events such as a job loss, a market downturn, medical scare, the death of a spouse who’s been the primary provider, and other untimely circumstances. Preparing for these unexpected events with an emergency fund, a smart investment plan, and regular financial checkups can often help you manage through these financially pressing times.

Establish a Cash Reserve

Anyone at any age can be affected by financial setbacks. That why it’s important to have an emergency fund to cover expenses when your cash flow is impacted. There are plenty of ways to build cash reserves, and it’s never too early or too late to begin. Having an emergency fund doesn’t negate the importance of long-term investing. Both should be priorities, though saving for an emergency fund should come first.

“You should always focus on having an ample cash reserve,” said Robert Siuty, a senior financial consultant at TD Ameritrade. “Have three to six months of expenses earmarked as you approach retirement.”

Maintain a Well Diversified Portfolio

A common setback can occur through stock market corrections. If you’re younger and have a well-diversified portfolio, you may be able to better weather the downturns, because time is on your side. Some younger investors view these downturns as an opportunity to accumulate assets at a relatively better price. But if the stock market takes a dive just as you near retirement, coping with losses can be difficult.

As you age, it’s often smart to start shifting your asset allocation so you’re not so vulnerable to possible market downturns. When you’re younger you may be able to afford to take on more risk, but as you get closer to retirement you need to manage your overall risk so you're not overly exposed.

Siuty said a conservative portfolio for an investor approaching retirement might be 25% in stocks and 75% in different types of fixed income. He calls this a “steady Eddie, slow and steady” approach that can potentially provide income and capital appreciation.

Regularly checking your asset allocation is crucial. The recent rally to record highs in the stock market might mean your portfolio has a bigger percentage of funds in stocks than necessary for your age or situation. Pay attention and shift funds around, if necessary.

Be Wary Of Early Retirement Fund Withdrawals

If you’re affected by a setback, chances are that you’ll need cash to tide you over. While it may be tempting to dip into your 401(k) plan, that should be the last thing you do after determining that there are no other savings to draw from.

Taking an early withdrawal from your retirement plan before age 59 ½ comes with a tax penalty. There are exceptions, however. If you’re putting money into your company’s 401(k) plan and the company lays you off in the year you turn 55 or any older, you may be able to take the money with no penalty. That typically only applies to money set aside in that company’s 401(k) plan, not to money you may have contributed to a previous employer’s plan. It also doesn’t apply if the money is in an IRA.

Remember, too, that retirement savings have the potential to compound over time, so any money you withdraw now won’t be there to grow in the future. Taking out even a relatively small amount—say $20,000—to get over a hump like an unexpected job loss can cost you many thousands more over the long run and mean less in the bank when you do leave the workforce for good.

Consider Your Alternatives

Job loss is among the more common setbacks individuals of all ages experience, and it may be particularly difficult for those nearing retirement to manage through. Maybe you expected to work until you were 62, but find yourself out of job at age 58. You’d planned to make major contributions to your retirement savings between 58 and 62, but now that’s in jeopardy.

“You need to re-think your retirement strategy,” said Dara Luber, senior manager of retirement, TD Ameritrade. “You have to look at your retirement savings and your spending, along with your wants, wishes, and goals. Can you afford to retire at 58, and do you want to?"

What if you lose your job, don’t have an emergency cash fund, and want to avoid taking a penalty or losing interest by withdrawing retirement money early?

Luber said some options might include:

Finding another full time job

Becoming an independent consultant in the industry where you worked

Taking on a side job working in an area where you’ve had hobbies (for instance, if you’ve always been a home improvement expert, maybe take a part-time position at a hardware or home improvement store).

Check into taking Social Security early (you normally would want to wait as long as possible to get the highest monthly payment, but you can take it as early as 62, if necessary).

When contemplating your options, you’ll need to consider your current and future expenses to determine how much income you may need to supplement your savings, including the increased cost of healthcare insurance. Perhaps you have a spouse or partner who can cover you in their healthcare plan. If not, private health insurance can be very expensive as you get older, and public insurance through Obamacare may not be a sure thing. Still, you never want to skimp on medical coverage.

“Make sure to look at your plan at least every year and re-evaluate,” Luber said. “Use the TD Ameritrade retirement calculator to help ensure you’re on track. Life happens, and if your situation changes—such as a job loss, loss of a spouse, etc., you may want to take a look at your portfolio and plan to see where you might need to make changes.”

Just as the best-built automobile can lose speed if it hits a pothole in the road, the best-laid retirement plan can run into an unexpected setback. Those who prepare by building emergency reserves and regularly reviewing their plans might have a better chance to emerge more smoothly when life throws them a curveball.

All investing involves risk including the possible loss of principal.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

Hands-On Retirement Planning

Retirement planning isn’t a set-it-and-forget-it proposition. A plan can take thoughtful care and maybe the help of a professional.

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